Chapter 11, Problem 1PB

1.

To determine

Journalize the liabilities transactions.

Explanation of Solution

Liabilities: Liabilities are debt and obligations of a business. These are the claims against the resources that a business owes to outsiders of the company. Liabilities may be Current liabilities, and Long-term liabilities.  Examples: Creditors, Bills payable, Bank overdraft, Salaries and wages payable, and Notes payable.

Prepare journal entry to record the liabilities transactions of Incorporation AM.

Date	Accounts and Explanation	Post Ref	Debit ($)	Credit ($)
April 15	Cash		225,000
	Notes Payable			225,000
	(To record borrowing from A Company by issuing 6% note)
May 1	Equipment		310,400
	Interest Expense (1)		9,600
	Notes Payable			320,000
	(To record purchase of equipment by issuing 6% discounted note)
May 15	Notes Payable		225,000
	Interest Expense (2)		1,125
	Notes Payable			225,000
	Cash			1,125
	(To record the payment of interest for A Company and renew the loan by issuing 8% note)
July 14	Notes Payable		225,000
	Interest Expense (3)		3,000
	Cash			228,000
	(To record payment of maturity and interest for notes)
August  16	Merchandise Inventory		90,000
	Accounts Payable			90,000
	(To record purchase of merchandise on account)
September 15	Accounts payable		90,000
	Notes Payable			90,000
	(To record the issue of 6% notes on account )
October 28	Notes Payable		320,000
	Cash			320,000
	(To record the payment of due amount)
October 30	Notes Payable		90,000
	Interest Expense (4)		675
	Cash			90,675
	(To record payment of maturity and interest for notes)
November 16	Store Equipment		450,000
	Notes Payable			400,000
	Cash			50,000
	(To record purchase of store equipment for cash and issuing of 9% notes)
December 16	Notes Payable		20,000
	Interest Expense (5)		150
	Cash			20,150
	(To record payment of maturity and interest for notes)
December 28	Litigation Loss		87,500
	Litigation Claims Payable			87,500
	(To record the accrual of litigation claims)

Table (1)

Working notes:

Calculate interest expense for discounted notes.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$320,000\times 6\%\times \frac{180}{360}\\ =\$9,600\end{array}$ (1)

Calculate interest expense for 30 days on notes.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$225,000\times 6\%\times \frac{30}{360}\\ =\$1,125\end{array}$ (2)

Calculate interest expense for 60 days on notes.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$225,000\times 8\%\times \frac{60}{360}\\ =\$3,000\end{array}$ (3)

Calculate interest expense for 45 days on notes.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$90,000\times 6\%\times \frac{45}{360}\\ =\$675\end{array}$ (4)

Calculate interest expense for 30 days on notes.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$20,000\times 9\%\times \frac{30}{360}\\ =\$150\end{array}$ (5)

• On April 15, Cash is debited as it increased the asset. Notes payable is credited as it increased the liability.
• On May 1, Equipment is debited as it increased the asset. Interest expense is debited as it decreases the equity value. Notes payable is credited as it increased the liability.
• On May 15, Notes payable is debited as it decreased the liability. Interest expense is debited as it decreases the equity value. Notes payable is credited as it increased the liability. Cash is credited as it decreased the asset.
• On July 14, Notes payable is debited as it decreased the liability. Interest expense is debited as it decreases the equity value. Cash is credited as it decreased the asset.
• On August 16, Merchandise inventory is debited as it increased the asset. Accounts payable is credited as it increased the liability.
• On September 15, Accounts payable is debited as it decreased the liability. Notes payable is credited as it increased the liability.
• On October 28, Notes payable is debited as it decreased the liability. Cash is credited as it decreased the asset.
• On October 30, Notes payable is debited as it decreased the liability. Interest expense is debited as it decreases the equity value. Cash is credited as it decreased the asset.
• On November 16, Store equipment is debited as it increased the asset. Notes payable is credited as it increased the liability. Cash is credited as it decreased the asset.
• On December 16, Notes payable is debited as it decreased the liability. Interest expense is debited as it decreases the equity value. Cash is credited as it decreased the asset.
• On December 28, Litigation loss is debited as it decreases the equity value. Litigation claims payable is credited as it increased the liability.

2. a

To determine

Journalize the adjusting entry for product warranty.

Explanation of Solution

Prepare journal entry to record product warranty.

Date		Accounts and Explanation			Post Ref	Debit ($)	Credit ($)
		Product Warranty Expense				26,800
			Product Warranty Payable				26,800
				(To record the accrual of warranty payable)

• Product warranty expense is an expense and it decreases the equity value. So, debit it by $26,800.
• Product warranty payable is a liability and it is increased. So, credit it by $26,800.

2. b

To determine

Journalize the interest on notes payable.

Explanation of Solution

Prepare journal entry to record interest on notes payable.

Date	Accounts and Explanation	Post Ref	Debit ($)	Credit ($)
	Interest Expense		4,275
	Notes Payable			4,275
	(To record interest on notes payable)

Working note:

Calculate interest expense on remaining amount of notes payable.

  $\begin{array}{c}\text{Interest}\text{expense}=\text{Remaining}\text{amount of notes payable}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\left(\$400,000-\$20,000\right)\times 9\%\times \frac{45}{360}\\ =\$4,275\end{array}$

• Interest expense is an expense and it decreases the equity value. So, debit it by $4,275.
• Notes payable is a liability and it is increased. So, credit it by $4,275.